Option Investor
Newsletter

Daily Newsletter, Sunday, 6/1/2014

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

New Highs For 2014

by James Brown

Click here to email James Brown

Stock market bulls remained in control for the last week of May. It was a four-day week with U.S. markets closed last Monday for Memorial Day. Elections in Europe and Ukraine last weekend failed to spark any concerns for equities. Pro-business "chocolate tycoon" Petro Poroshenko won Ukraine's presidential election. He had previously served as Minister of Foreign Affairs and Minister of Trade and Economic Development.

Here at home the U.S. market has ignored disappointing economic data. The Q1 GDP revision came in worse than expected but the blame it on the weather excuse continues to work. At least the bond market is paying attention. Concerns over the economy continue to fuel a rally in bonds and the yield on the U.S. ten-year note fell to new 2014 lows. The yield hit 2.40% on Thursday. The yield settled at 2.45% on Friday.

Volatility remains nonexistent in the major indices. The VIX closed the week at another new 52-week low and the S&P 500 index spent Friday's session in a narrow seven-point range. We are five months into 2014 and the S&P 500 is hitting new all-time highs with a +4.0% gain for the year. Oil stocks are up +8.25% and the XLE energy ETF is hitting all-time highs. The Dow Transportation Average is up +9.5% in 2014 and hitting new all-time highs. Biotechs are up +11% year to date and the SOX semiconductor index is up +12.0% for 2014.

Economic Data

We had plenty of economic headlines last week. The Chicago PMI data improved from 63.0 in April to 65.5 in May. That was better than expected. The Dallas Fed survey disappointed with a drop below expectations of 9.6 to 8. The Richmond Fed manufacturing survey also disappointed with a decline to 7 versus estimates of 9. Durable goods orders improved +0.8% compared to estimates for a -0.8% pullback. The Case-Shiller 20-city home price index rose +1.2% in March and showed that home prices are up +12.4% from a year ago. Unfortunately pending home sales plunged from +3.4% in March to +0.4% in April.

Confidence seems to be fading. The University of Michigan Consumer Confidence survey dropped from 84.1 in April to 81.9 in May. The present conditions component hit its lowest levels since November with a drop to 94.5. The expectations component also slipped. Corporate confidence continues to slip as well with the Bloomberg Orange Book CEO confidence survey falling to a 52-week low.

Thursday unveiled the newest Q1 GDP estimate, which was revised lower from a +0.1% gain to -0.98%. It marks the first contraction in the U.S. economy since a -1.3% drop in Q1 2011. The Q1 2014 decline follows the +2.6% gain in Q4 2013. Nearly all of the GDP decline was due to weak inventory data. The stock market ignored the news and blamed it on the extraordinarily cold Q1 winter weather. Many analysts believe the U.S. will see a huge snap back in business activity in the second quarter with some estimates suggesting +4% growth. Unfortunately we're not seeing that happen yet. Personal spending in April declined -0.1% compared to estimates for +0.2% growth. This certainly does not support the "pent-up demand" theory for Q2 growth.

Overseas Data

Germany said their retail sales declined -0.9% for the month, which was worse than expected. German unemployment held steady at 6.7%. French consumer spending also declined with a -0.3% drop for the month. Meanwhile Eurozone consumer confidence inched higher from -8.6 to -7.0.

In Asia most of the headlines came from Japan. April retail sales in Japan plunged -4.4% year over year. That was worse than expected and the worst decline since 2011. This is likely a reflection on Japan's consumption tax, which started April 1st. Consumers rushed to make their purchases before the tax began and pulled business forward into March. Japan also said their household spending dropped -4.6% year over year.





Major Indices:

Big cap stocks continue to lead the rally and the S&P 500 added +1.2% for the week and closed at new all-time highs. The index added +2.1% in May and broke through resistance at the 1900 level.

You can see on the daily chart below that the S&P 500 index is nearing previous resistance at its trend of higher highs. We could see the index tag this trend line and then pullback to 1900, which should be new support. Below that there should be additional support at its 50-dma near 1880. If the S&P 500 rally pushes through the trend line of resistance then the 1940-1950 area is the next likely area to find resistance.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite delivered a +1.3% gain for the week and a +3% gain for the month of May. The recent breakout from its consolidation phase is encouraging but it might be time for a pullback. The 4150-4200 area might offer some support.

If this rally continues unabated then the next levels to watch are potential resistance at 4300 and the 2014 highs near 4371.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 chart is probably the most troubling this week. The $RUT gained +0.74% for the week and is up +0.8% for the month of May. This reduced its year to date loss to -2.5%.

The current bounce has broken through some resistance levels. However, the rally has stalled these past three days near 1140 and its 50-dma and 150-dma.

If the $RUT sees a pullback there might be short-term support around 1120 and its 200-dma. Otherwise the closest support is around 1180.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

It is the beginning of a new month. That means lots of economic data. Economists are hoping for small improvements in both the manufacturing ISM and the services ISM. The biggest report in the U.S. will be Friday's nonfarm payrolls (jobs) report. Analysts are estimating +215,000 new jobs in May, down from +288,000 in April. If this number is too weak it will damage the argument that the U.S. will see a big snap back rebound in Q2 economic activity.

One of the most important events this week will be the ECB meeting on Thursday. ECB President Mario Draghi has all but promised some form of stimulus for the EU. Unfortunately they can't enact the same sort of QE program that the U.S. Federal Reserve has done. Draghi will have to come up with some other unconventional form of stimulus as the ECB tries to fight off the specter of deflation.

It's also worth noting that on Sunday we'll see the HSBC China PMI data. This has been stuck in contraction territory for the last few months.

Economic and Event Calendar

- Monday, June 02 -
ISM Index for May
Construction spending
Eurozone PMI data

- Tuesday, June 03 -
Factory Orders
Auto & Truck sales for May

- Wednesday, June 04 -
ADP Employment Change report
Eurozone Services PMI data
ISM Services Index
Federal Reserve's Beige Book report

- Thursday, June 05 -
Weekly Initial Jobless Claims
Bank of England interest rate decision
European Central Bank (ECB) interest rate decision
ECB President Mario Draghi press conference

- Friday, June 06 -
Nonfarm (jobs) payroll report for May
Unemployment rate

Looking Ahead:

Thus far the stock market bulls have proven themselves quite the climbers. Every time another problem gets added to the market's wall of worry the bulls manage to scale it. Terrible Q1 U.S. growth? No problem. QE slowing down and higher rates on the horizon? No Problem. A belligerent Russia that basically invaded and annexed part of Europe? No problem. An economic slowdown in China? No problem. A slowing U.S. housing market? No problem.

This bullet proof stock market has not stopped the bears from shooting at it. This past week there has been a lot of chatter about how today's market eerily resembles the stock market of May 2007. Back in May 2007 we faced similar issues with big cap strength masking broader market weakness. May 2007 also had very low volatility and a struggling housing sector. Of course it's also worth noting that the stock market continued to rally for another five months and didn't peak until October 2007.

Speaking of market tops, an analyst at Bank of America Merrill Lynch is predicting that stocks will continue to drift higher this summer and then see a -15% to -20% correction before the year is over. Merrill Lynch's Hedge Fund Monitor said big investors have actually gone net short on the S&P 500. Short positions on the Russell 2000 are at two-year highs and bullish bets on the NASDAQ are at one-year lows. Either smart money is betting big on a market correction or they're going to get squeezed out of these bearish bets and thus add more fuel to the bull market's fire.

There is also a concern among market pundits that the ECB's move to announce some sort of economic stimulus has been so telegraphed that it's already baked into the market. Instead of seeing a rally on the ECB announcement we could actually see a sell the news event.

I do have some positive news on the Russian front. The U.S. says Russia has pulled back the majority of their armed forces from the Ukraine border. Russia still has several thousand troops stationed on the border but it would appear that Russian President Putin has cooled his aggressive stance and will take a wait and see approach. Ukraine is still experiencing fighting between pro-Russian rebels and government forces. There's no guarantee this will fade away just yet.

Technically nothing has changed for us. The S&P 500 is still overdue for a correction. We are in the middle of the worst six months of the year. Trading volumes will slowly dry up over summer, which could exacerbate any market moves. Volatility remains unusually, dangerously low and signaling a potential market top soon. Yet none of this means that equities can't continue to march higher for months to come. We just can't be surprised when the correction eventually shows up.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The market continues to melt higher as investors fears of missing out on the rally outweigh worries of economic weakness.

DOW and TPX have graduated from our watch list to our active portfolio.

The plan was to exit our CHK trade on Tuesday, May 27th.

I have updated the stop loss on JOY.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.




New Plays

Overshadowing Concerns

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(June 01, 2014)

The equity markets continue to push higher as stocks ignore disappointing economic data here in the U.S. and around the world. This blissful ignorance can't last forever. Either stocks will correct or economic activity needs to improve.

I am seeing a lot more bullish candidates. However, investors should be concerned that the S&P 500 is nearing potential resistance while the volatility index (vix) remains dangerous low.

This coming week will also have potential market moving events with the ECB decision and the U.S. jobs report. Everyone expects the ECB to announce some sort of stimulus and the markets could actually see a sell the news event. If job growth in the U.S. doesn't improve it's going to be a wet blanket on the Q2 snap back growth expectations.

We did have a successful week with the watch list as DOW and TPX graduated to our active plays section of the newsletter. Tonight we're adding DVA and EXPE as new watch list candidates.

I would also keep my eye on WAG and HTZ as potential candidates. HTZ has earnings coming up on June 9th so we'll wait until after they report earnings and then re-evaluate. WAG looks good now but my broader market concerns are overshadowing any bullishness I have for WAG.

No new plays tonight.




Play Updates

A Handful of Highs

by James Brown

Click here to email James Brown

Editor's Note:

DOW and TPX have graduated from our watch list to our active play list.

Shares of CAT and JOY are not acting well. JOY could see a volatile move after its earnings this Thursday.


Closed Plays


We closed CHK on Tuesday, May 27th



Play Updates


American Intl. Group - AIG - close: 54.07

Comments:
06/01/14: AIG is still slowly drifting higher. Shares ended the month of May near new multi-year highs. Readers could launch positions now at current levels.

Our long-term target is the $65-70 zone. Currently the point & figure chart is bullish with a $64 target.

- Suggested Positions -
May 14, 2014 - entry price on AIG @ 53.94, option @ 1.50*
symbol: AIG150117C60 2015 JAN $60 call - current bid/ask $1.55/1.58

- or -

May 14, 2014 - entry price on AIG @ 53.94, option @ 4.35*
symbol: AIG160115C60 2016 JAN $60 call - current bid/ask $4.20/4.30

05/14/14 trade opens. AIG opens at $53.94
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/13/14 AIG closed at $53.96, above our suggested trigger above $53.75
Please note I'm listing the standardized option symbol:
symbol-year-month-day-call-strike

Current Target: AIG 65.00
Current Stop loss: 49.75
Play Entered on: 05/14/14
Originally listed on the Watch List: 05/11/14


Caterpillar Inc. - CAT - close: 102.23

Comments:
06/01/14: CAT performed exactly as I feared with shares failing at short-term resistance in the $104-105 area. If this pullback continues we could see CAT retesting round-number support at $100.00.

I am not suggesting new positions at this time.

Earlier Comments:
Our long-term target is the $115-125 zone. Currently CAT's point & figure chart is bullish with a $126 target.

- Suggested Positions -
APR 03, 2014 - entry price on CAT @ 101.92, option @ 3.50*
symbol: CAT1517a110 2015 JAN $110 call - current bid/ask $2.54/2.65

- or -

APR 03, 2014 - entry price on CAT @ 101.92, option @ 7.40*
symbol: CAT1615a110 2016 JAN $110 call - current bid/ask $6.10/6.40

04/27/14 new stop @ 98.45
04/03/14 trade opens. CAT @ 101.92
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/02/14 CAT meets our entry trigger with a close above $101.00

Current Target: CAT @ 115.00-125.00 zone
Current Stop loss: 98.45
Play Entered on: 04/03/14
Originally listed on the Watch List: 03/30/14


The Walt Disney Co. - DIS - close: 84.01

Comments:
06/01/14: Shares of DIS crept high enough to close at new all-time highs this past week. Shares are arguably short-term overbought here. I wouldn't be surprised to see a dip near $82.00.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $11.10/11.40

05/26/14 new stop @ 77.75
05/11/14 new stop @ 75.75, adjust exit target from $89 to $97.50
04/27/14 DIS looks poised to hit new relative lows and our stop loss
04/13/14 investors may want to take profits now. DIS could be headed for $70.00
03/09/14 new stop loss @ 74.75, traders may want to take some money off the table here. DIS is overbought and due for a dip.
03/02/14 new stop loss @ 71.75
02/16/14 more conservative traders may want to take profits now.
We are adjusting our long-term target from $84 to $89
01/05/14 new stop loss @ 69.40
12/29/13 new stop loss @ 67.40
12/08/13 new stop loss @ 65.75
11/24/13 new stop loss @ 64.75

Current Target: DIS @ 97.50
Current Stop loss: 77.75
Play Entered on: 10/23/13
Originally listed on the Watch List: 10/13/13


The Dow Chemical Co. - DOW - close: $52.12

Comments:
06/01/14: DOW delivered a strong performance last week with the stock breaking out from a nearly three-month consolidation. We had DOW on our watch list with a trigger to buy calls if shares closed above $51.25. The stock met our entry requirement on the 28th.

If you missed our entry point consider buying calls on a dip near $51.00, which should be new support.

Earlier Comments:
DOW is in the basic materials sector. The company supplies chemical products as raw materials. The stock is currently in a long-term bullish channel. Investors have lifted shares to multi-year highs as market participants search for yield. DOW currently offers a 3.0% annual yield. Plus, they have an aggressive stock buyback program and plan to buy back $4.5 billion in stock this year.

DOW's business is doing well too. They have faced some rising prices for feedstock and energy costs. Yet they have managed to grow margins in the rest of their business. Management believes this margin growth will continue in 2014. Their Q1 2014 earnings were up +75% from a year ago and marked their sixth quarter in a row of year-over-year earnings growth.

- Suggested Positions -
MAY 29, 2014 - entry price on DOW @ 51.78, option @ 1.95
symbol: DOW150117C55 2015 JAN $55 call - current bid/ask $2.05/2.10

- or -

MAY 29, 2014 - entry price on DOW @ 51.78, option @ 3.90*
symbol: DOW160115C55 2016 JAN $55 call - current bid/ask $3.95/4.15

05/29/14 trade begins. DOW opens at $51.78
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/28/14 DOW closed at $51.77, above our trigger of $51.25
Option Format: symbol-year-month-day-call-strike

Chart of DOW:

Current Target: DOW @ 60.00
Current Stop loss: 47.75
Play Entered on: 05/29/14
Originally listed on the Watch List: 05/26/14


Hess Corp. - HES - close: 91.30

Comments:
06/01/14: Traders bought the dip in HES at technical support on its 30-dma. Shares rebounded to close at new multi-year highs. If you were looking for a new entry point then I would consider new positions here at current levels.

Be forewarned that I do expect the $100 level to offer some round-number, psychological resistance.

- Suggested Positions -
APR 22, 2014 - entry price on HES @ 87.50, option @ 3.15*
symbol: HES1517a95 2015 JAN $95 call - current bid/ask $ 3.60/ 3.80

- or -

APR 22, 2014 - entry price on HES @ 87.50, option @ 5.80*
symbol: HES1615a100 2016 JAN $100 call - current bid/ask $ 5.80/6.35

05/22/14 stock spikes as HES announces $2.6 billion deal to sell its gas station business to Marathon.
05/04/14 new stop @ 83.45
04/30/14 HES delivered better than expected earnings and revenues
04/22 trade opened. HES opens at $87.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/21 HES closes at $87.78, above our entry trigger of $87.50

Current Target: HES @ 109.00
Current Stop loss: 83.45
Play Entered on: 04/22/14
Originally listed on the Watch List: 04/06/14


Honeywell Intl. - HON - close: 93.15

Comments:
06/01/14: HON's latest bounce from support near $90.00 continued last week. The stock is back above potential resistance at its 50-dma and 100-dma but remains inside a four-month consolidation range ($90-96).

More conservative investors may want to just take profits now. I am not suggesting new positions at this time.

- Suggested Positions -
(closed the 2014 calls on May 20th at the open)
MAY 07, 2013 - entry price on HON @ 76.20, option @ 2.68
symbol: HON1418a80 2014 JAN $80 call - exit $5.10 (+90.2%)

- or -

MAY 07, 2013 - entry price on HON @ 76.20, option @ 4.10
symbol: HON1517a85 2015 JAN $85 call - current bid/ask $ 9.95/10.15

04/27/14 investors may want to just take profits now!
03/02/14 new stop loss @ 89.75, adjust target to $99.00
02/09/14 new stop loss @ 87.45
12/29/13 new stop loss @ 84.85
12/22/13 adjust the exit target to $98.00
...please see earlier newsletter for prior comments...
The plan was to use small positions to limit our risk.

Current Target: exit when HON hits $99.00
Current Stop loss: 89.75
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13



Illinois Tool Works, Inc. - ITW - close: 86.55

Comments:
06/01/14: ITW barely eked out a gain for the week. Lack of follow through on the prior week's rally is a bit surprising. I would hesitate to launch new positions here.

- Suggested Positions -
MAY 13, 2014 - entry price on ITW @ 87.57, option @ 3.40*
symbol: ITW1517a90 2015 JAN $90 call - current bid/ask $ 2.50/ 2.65

- or -

MAY 13, 2014 - entry price on ITW @ 87.57, option @ 6.65*
symbol: ITW1615a90 2016 JAN $90 call - current bid/ask $ 5.70/ 6.00

05/13/14 trade begins. ITW opens at $87.57
05/12/14 ITW closes @ 87.17, above our suggested entry above $86.50

Current Target: ITW @ $98.00
Current Stop loss: 81.75
Play Entered on: 05/13/13
Originally listed on the Watch List: 05/04/14


Joy Global Inc. - JOY - close: 57.15

Comments:
06/01/14: Shares of JOY continue to disappoint. Declines in gold, silver, and copper last week did not help. Concerns over the price of steel and iron ore are also negative factors. This pushed JOY to its fifth weekly loss in the last six weeks.

The company is due to report earnings on June 5th (Thursday) before the opening bell. Analysts are expecting a profit of 71 cents a share. I do expect JOY to see a big move on Thursday but it could go either direction. More conservative investors may want to abandon ship prior to the earnings report.

Currently our stop loss is $55.75. Tonight I am adjusting it to $55.45 so it's just below the simple 200-dma (currently $55.65). If JOY disappoints with its earnings or its guidance then I do expect JOY to hit our stop loss. If JOY delivers bullish news then the stock could soar. The most recent data listed short interest at 20% of the 100 million share float. That is plenty of fuel for a short squeeze.

- Suggested Positions -
APR 08, 2014 - entry price on JOY @ 60.75, option @ 4.40
symbol: JOY1517a65 2015 JAN $65 call - current bid/ask $ 1.90/ 2.02

- or -

APR 08, 2014 - entry price on JOY @ 60.75, option @ 6.05
symbol: JOY1615a70 2016 JAN $70 call - current bid/ask $ 3.10/3.50

06/01/14 adjust stop loss to $55.45
04/08/14 JOY hit our entry trigger at $60.75

Current Target: We're aiming for the $75-80 zone
Current Stop loss: 55.45
Play Entered on: 04/08/13
Originally listed on the Watch List: 04/06/14


NuStar Energy - NS - close: 58.02

Comments:
06/01/14: After a five-day decline shares of NS bounced off their simple 40-dma. More conservative investors may want to raise their stop loss.

I am not suggesting new positions at this time.

Earlier Comments:
Our target is $64.50. More aggressive investors with a longer time frame may want to aim higher since the point & figure chart is targeting an $87 target.

- Suggested Positions -
APR 04, 2014 - entry price on NS @ 55.25, option @ 3.10*
symbol: NS1517a55 2015 JAN $55 call - current bid/ask $ 4.20/4.70

05/18/14 new stop @ 53.75
04/04/14 our play opens. NS @ 55.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/03/14 NS closes above $55.25
Current Target: exit calls when NS hits $64.50
Current Stop loss: 53.75
Play Entered on: 04/04/14
Originally listed on the Watch List: 03/23/14


QUALCOMM Inc. - QCOM - close: 80.45

Comments:
06/01/14: QCOM is still slowly drifting higher. The stock looks like it's building up steam for a rally past resistance at its April highs (near $81.00-81.50). I am not suggesting new positions at this time.

QCOM is a big supplier to Apple (AAPL) and AAPL is holding its Worldwide Developers Conference on June 2nd. If AAPL comes out with any bullish news it could give shares of QCOM a boost.

Speaking of AAPL, many investors are expecting AAPL to unveil their iPhone 6 in September. If this new product is received well this too could give shares of QCOM a boost.

- Suggested Positions -
NOV 15, 2013 - entry price on QCOM @ 71.34, option @ 4.90
symbol: QCOM1517a75 2015 JAN $75 call - current bid/ask $7.40/7.55

05/18/14 new stop @ 75.75, more conservative traders may want to take some money off the table.
04/24/14 QCOM's earnings were a disappointment and they disclosed a Wells Notice. Investors may want to exit now and wait for the dust to clear.
04/20/14 new stop @ 74.70
03/30/14 new stop @ 73.75
03/23/14 new stop @ 71.75
03/04/14 QCOM raises dividend and buyback program
02/19/14 QCOM being investigated by Chinese authorities
01/19/14 new stop loss @ 69.45
12/08/13 new stop loss @ 67.75
11/15/13 trade opens. QCOM @ 71.34
11/14/13 QCOM closes above entry trigger (above 70.50)

Current Target: $85.00
Current Stop loss: 75.75
Play Entered on: 11/15/13
Originally listed on the Watch List: 11/03/13


Tempur Sealy Intl. - TPX - close: 54.98 change: +0.75

Comments:
06/01/14: TPX was a watch list candidate. The plan was to wait for shares to close above $55.50 and buy calls the next day. TPX surged on Tuesday last week and closed at $56.03. Our traded opened the next morning

Midweek both Citigroup and Piper Jaffray analysts noted that mattress sales were up in April according to data from the ISPA. Traders bought the dip in TPX near its 10-dma on Thursday and Friday.

I would consider new positions now at current levels but more conservative traders may want to wait for another close above $55.50 as an alternative entry point.

Earlier Comments:
TPX is in the consumer goods sector. The company manufactures and markets bedding products including mattresses, pillows, and other bed-related hardware. The stock has been slowly recovering from its disastrous 2012 performance. Tempur purchased its rival Sealy in 2013 and this virtually doubled its overall sales. Yet margins retreated from 50% to 40% due to Sealy's lower margins.

TPX has managed to build on its acquisition of Sealy. Both the Q4 and Q1 earnings results delivered better than expected performance on both the top and bottom line. TPX management believes they will continue to see margins improve in 2014 as they focus on synergies from their Sealy acquisition. They just recently purchased the Sealy brand rights in Japan and Continental Europe, which "represent significant future growth" for the company.

The stock's trend is higher but I'll confess TPX doesn't move super fast. We'll need to be patient with this trade. The point and figure chart is bullish and is currently forecasting at $70 target.

- Suggested Positions -
MAY 28, 2014 - entry price on TPX @ 55.86, option @ 4.75*
symbol: TPX150117C60 2015 JAN $60 call - current bid/ask $4.00/4.30

- or -

MAY 28, 2014 - entry price on TPX @ 55.86, option @ 6.50*
symbol: TPX160115C70 2016 JAN $70 call - current bid/ask $5.20/6.20

05/28/14 trade begins. TPX opens at $55.86
05/27/14 TPX closed at $56.03, above our trigger of $55.50
Option Format: symbol-year-month-day-call-strike

Chart of TPX:

Current Target: TPX @ 69.00
Current Stop loss: 49.75
Play Entered on: 05/28/14
Originally listed on the Watch List: 05/26/14


Wells Fargo & Co. - WFC - close: 50.78

Comments:
06/01/14: WFC continues to outperform its rivals in the financial sector. WFC is up +11% for the year while other large money center banks are still negative for 2014. Shares have broken out past key resistance at the $50.00 level and look poised to hit new highs.

In the news last week WFC announced it was close to a $67 million settlement on the robo-signing scandal a few years ago. Putting this issue to rest will remove another black cloud over this big bank's future.

WFC's management also said they would love to boost the amount of capital they return to shareholders. They'd like to pay out 55% to 75% of their net profits back to shareholders as dividends and stock buybacks. That's up from 34% in 2013. Any changes still have to be approved by regulators.

If you were looking for a new bullish entry point then a close above $50.50 might be a good alternative entry point.

- Suggested Positions -
DEC 26, 2013 - entry price on WFC @ 45.50, option @ 1.50
symbol: WFC1517a50 2015 JAN $50 call - current bid/ask $ 2.74/2.78

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - current bid/ask $ 4.25/4.40

05/26/14 adjust long-term target from $54.50 to $59.00
04/06/14 WFC looks poised for a pullback
03/30/14 new stop loss @ 44.80
03/09/14 new stop loss @ 43.90
01/19/14 new stop loss @ 42.90
12/26/13 trade opens with WFC @ $45.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
12/24/13 WFC closed @ 45.39, above our trigger at $45.25

Current Target: Exit WFC hits $59.00
Current Stop loss: 44.80
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13



Williams Sonoma - WSM - close: 66.92

Comments:
06/01/14: I warned investors last week that WSM could see some profit taking and might try and fill the gap. Shares did see a pullback from its post-earnings pop.

I am not suggesting new positions at this time.

- Suggested Positions -
MAY 13, 2014 - entry price on WSM @ 64.36, option @ 2.95*
symbol: WSM1517a70 2015 JAN $70 call - current bid/ask $ 3.40/3.80

-- or --

MAY 13, 2014 - entry price on WSM @ 64.36, option @ 4.70*
symbol: WSM1615a75 2016 JAN $75 call - current bid/ask $ 4.90/5.40

05/13/14 trade begins. WSM opened at $64.36
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/12/14 triggered. WSM closed at $64.55, above our trigger of $64.50

Current Target: Our target is WSM in the $75-85 zone.
Current Stop loss: 59.75
Play Entered on: 05/13/14

Originally listed on the Watch List: 05/04/14



CLOSED Plays


Chesapeake Energy - CHK - close: 28.72

Comments:
06/01/14: CHK was not performing well. In our last newsletter we decided to exit positions on Tuesday morning, May 27th. The stock opened up 11 cents on Tuesday at $27.79.

- Suggested Positions -
MAY 13, 2014 - entry price on CHK @ 30.34, option @ 1.24
symbol: CHK150117C35 2015 JAN $35 call - exit $0.56* (-62.0%)

- or -

MAY 13, 2014 - entry price on CHK @ 30.34, option @ 2.75
symbol: CHK160115C35 2016 JAN $35 call - exit $1.71 (-37.8%)

05/27/14 planned exit
*option exit price is an estimate since the option did not trade at the time our play was closed.
05/26/14 prepare to exit immediately on Tuesday morning (May 27th)
05/13/14 trade begins. CHK opened @ $30.34
05/12/14 CHK closed @ 30.33, above our trigger at $30.25
Please note I'm listing the standardized option symbol:
symbol-year-month-day-call-strike

Chart of CHK:

Current Target: CHK @ 40.00
Current Stop loss: 26.75
Play Entered on: 05/13/14

Originally listed on the Watch List: 05/11/14



Watch

Healthcare & Travel

by James Brown

Click here to email James Brown


New Watch List Entries

DVA - DaVita Healthcare Partners

EXPE - Expedia Inc.


Active Watch List Candidates

AAL - American Airlines Group

HAL - Halliburton Co.

PKG - Packaging Corp. of America

VFC - V.F. Corp.


Dropped Watch List Entries

DOW and TPX have graduated to our active play list.



New Watch List Candidates:


DaVita Healthcare Partners - DVA - close: 70.59

Company Info

DVA is in the healthcare sector. The company provides kidney dialysis services and related lab services. The most recent earnings report was lackluster but DVA did report revenue growth above Wall Street estimates. Management has been buying up smaller domestic rivals and expanding overseas into countries like China, Columbia, Germany, India, Malaysia, Portugal, Saudi Arabia, and Taiwan. In the U.S. DVA has about 35% of the outpatient dialysis market.

Bears on this stock would argue the company is at risk for pricing pressures from Medicare. About 90% of its total U.S. dialysis patients are on some form of government-assisted program. Nearly 80% of are part of Medicare. The latest rules from Medicare said there would be no price changes in 2014 and 2015 but there could be reimbursement reductions in 2016 and 2017.

This pressure from Medicare has not stopped Warren Buffet's Berkshire Hathaway from raising its stake in DVA. Berkshire started investing in DVA back in Q4 2011. They have been slowly building a position and this past quarter (Q1 2014) Berkshire added another 1.1 million shares. Their total position is now 37.6 million shares worth about $2.6 billion. Berkshire tends to be a long-term investors, longer than our timeframe but it is still a vote of confidence for DVA.

Shares of DVA are currently breaking out from a sideways consolidation in the $67-70 zone. I am suggesting we wait for DVA to close above $71.25 and buy calls the next day with a stop loss at $66.40. If triggered our long-term target is the $85 region.

Breakout trigger: Wait for a close above $71.25
then buy calls the next day with a stop at $66.40

BUY the 2015 Jan $75 call (DVA150117C75) current ask $2.25

- or -

BUY the 2016 Jan $80 call (DVA160115C80) current ask $4.30

Option Format: symbol-year-month-day-call-strike

Chart of DVA:

Originally listed on the Watch List: 06/01/14


Expedia Inc. - EXPE - close: 73.30

Company Info

EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a trend of beating analysts' estimates with strong profit and revenue growth. This past quarter EXPE reported revenues of $1.2 billion. That is the fifth quarter in a row that EXPE has delivered double-digit year over year revenue growth. The company has also seen surging growth in its bookings. Q3 2014 saw 15% bookings growth. Q4 2014 was +21%. Q1 2014 was +29%.

Analyst firm Cantor Fitzgerald recently offered bullish comments on EXPE and raised their price target. The company is having success with its Expedia Traveler Preference program. In Q3 2013 there were about 35,000 hotels in the program. By Q1 2014 that has grown to 51,000 hotels. As more hotels join it will boost EXPE's room nights metric and sales.

Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Apaloosa had initiated a new stake in EXPE in the first quarter of 2014.

Bears could argue that EXPE, PCLN and OWW could face competition from companies like Google and Facebook as they seek to boost their ad revenues to their large audiences. Reuters has reported that Google is experimenting with some programs with a few hotels. This threat is probably a few years away and could eventually make EXPE as potential take over target.

Technically EXPE experienced a correction from $81 to $67 earlier this year. The stock found support in the $67 area and just recently EXPE has broken out past some key resistance. Currently shares hover just below short-term resistance at $74.00.

I am suggesting we wait for EXPE to close above $75.00 and buy calls the next day with a stop loss at $69.25. Our long-term target is the $90-100 zone.

Breakout trigger: Wait for a close above $75.00
then buy calls the next day with a stop at $69.25

BUY the 2016 Jan $90 call (EXPE160115C90) current ask $7.60

Option Format: symbol-year-month-day-call-strike

Chart of EXPE:

Originally listed on the Watch List: 06/01/14


Active Watch List Candidates:



American Airlines Group, Inc. - AAL - $40.16

Comments:
06/01/14: Airline stocks continued to drift higher last week. AAL if flirting with a bullish breakout past resistance at $40.00. Investors may want to launch positions now. Our strategy calls for waiting until AAL closes above $40.25 then buy calls the next day.

Earlier Comments:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,700 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

Wall Street was worried about the merger between these two big airlines as the U.S. Justice Department initially tried to block the deal. Regulators feared that new company would be too big, hold too much power, and reduce competitiveness and thus impact pricing for consumers. Fortunately, a U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

Summer is almost here and should mean good news for airlines. In addition to more vacation travelers the industry won't have to worry about so many cancellations. The 2014 winter season was brutal. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years.

The Wall Street crowd is bullish on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

On a short-term basis shares of AAL are sitting just below resistance at $40.00. I am suggesting we wait for AAL to close above $40.25 and then buy LEAPS the next morning. We'll start with a stop loss at $36.40. We will tentatively set our exit target at $50.00 for now.

Breakout trigger: Wait for a close above $40.25
then buy calls the next day with a stop at $36.40

BUY the 2015 Jan $45 call (AAL150117C45) current ask $2.65

- or -

BUY the 2016 Jan $45 call (AAL160115C45) current ask $5.70

Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 05/18/14


Halliburton Co. - HAL - close: 64.64

Comments:
06/01/14: Energy stocks continue to lead the market higher. HAL is poised for a bullish breakout past resistance near $64.00.

Earlier Comments:
HAL is in the basic materials sector. The company is part of the oil equipment and services industry. They are considered one of "the big three" in the oilfield services industry, competing with Schlumberger (SLB) and Baker Hughes (BHI). Believe it or not but HAL was the first company to "frack" a well in the U.S. over sixty years ago.

The stock is in a long-term up trend. HAL did see a little correction in November-December 2013 but has since been stair-stepping higher. The company has been consistently buying back stock. They repurchased nine million shares in the first quarter and still have $1.2 billion left on their current buy back program.

Earnings have been strong. Their Q4 results beat Wall Street's top and bottom estimates. HAL managed to do it again with their Q1 results and beat analysts' earnings and revenue estimates in spite of a slow down in Brazil and Mexico drilling activity.

Some would consider HAL cheap with a forward-looking P/E of 12.4 based on its 2015 earnings estimates of $5.07 a share. Many Wall Street firms have price targets in the $80 range. Speaking of Wall Street, the current golden boy of Wall Street David Tepper and his Appaloosa Management fund raised their stake in HAL in the first quarter of 2014. This stock was their sixth largest holding.

Currently HAL is consolidating below resistance at the $65.00 level. I am suggesting we wait for HAL to close above $65.50 and then buy calls the next day with a stop loss at $59.75. If triggered our long-term target is the $80-85 zone.

Breakout trigger: Wait for a close above $65.50
then buy calls the next day with a stop loss at $59.75

BUY the 2015 Jan $70 call (HAL150117C70) current ask $2.54

- or -

BUY the 2016 Jan $70 call (HAL160115C70) current ask $5.90

Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 05/26/14


Packaging Corp of America - PKG - $69.16

Comments:
06/01/14: PKG is showing signs of life as the rebound picks up speed. The stock is now up three weeks in a row and last week shares broke through technical resistance at the 50-dma. I do not see any changes from my earlier comments.

Earlier Comments:
PKG is in the consumer goods sector. The company makes containerboard and corrugated packaging materials in the U.S., Canada, Europe, and Mexico. The stock was a big winner last year thanks in large part to PKG's accelerated growth. The company saw 2013 earnings surge to $436 million, up from $164 million in 2012.

PKG just recently acquired Boise and the new merged company is now the fourth-largest containerboard and corrugated packaging maker in the U.S. Management said they expected significant synergies with the acquisition but the results have actually been better than expected.

The last couple of earnings reports from PKG were both bullish with the company beating Wall Street's estimates on the top and bottom line. The latest announcement for the first quarter reaffirmed their full-year 2014 guidance.

Technically the stock has seen a $10 correction (about -13%) with the pullback from $75 to $65. Now shares are starting to rebound from support near $65 and its long-term trend line of higher lows (see weekly chart below). There is potential resistance at the 50-dma and the $70.00 level.

I am suggesting we wait for PKG to close above $70.50 and buy calls the next day. We'll start with a stop loss at $64.75. Our long-term target is the $90 area.

Breakout trigger: Wait for a close above $70.50
buy calls the next day with a stop loss at $64.75.

BUY the 2015 Jan $75 call (PKG150117C75) current ask $2.25

- or -

BUY the 2016 Jan $75 call (PKG160115C75) current ask $5.80

(note: I have listed the more standardized option symbol format.
symbol-year-month-day-call-strike )

Originally listed on the Watch List: 05/18/14


V.F. Corp. - VFC - $63.02

Comments:
06/01/14: VFC is slowly drifting higher. I do not see any changes from my earlier comments.

Earlier Comments:
VFC is in the consumer goods sector. The company makes apparel and footwear for sale in the U.S. and Europe. Products include handbags, luggage, backpacks, accessories. Major brands include The North Face, Vans, Timberland, Kipling, Jansport, Reef, Smartwool, Eastpak, Wrangler, Lee, just to name a few.

After big gains in 2013 shares of VFC have been consolidating sideways. The company split their stock 4-for-1 back in December 2013. VFC guided lower back in February but the market reaction was a one-day event. Shares have since recovered. Their most recent report was bullish with VFC beating estimates. That's significant since so many apparel makers blamed the weather on a terrible Q1.

There has been growing speculation that VFC might be Lululemon (LULU) or another athletics apparel brand. Normally the acquiring company's stock goes down on a merger announcement but lately Wall Street has been sending the acquirer's stock higher on positive M&A news.

Technically shares look poised to breakout from their five-month consolidation. The Point & Figure chart is already bullish and forecasting an $80 target.

I am suggesting we wait for VFC to close above $64.25 and then buy calls the next day with a stop loss at $59.75. Our long-term target is the $75.00 region.

Breakout trigger: Wait for a close above $64.25
buy calls the next day with a stop loss at $59.75

BUY the 2015 Jan $70 call (VFC150117C70)

- or -

BUY the 2016 Jan $70 call (VFC160115C70)

(note: I have listed the more standardized option symbol format.
symbol-year-month-day-call-strike )

Originally listed on the Watch List: 05/18/14